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Stock Price Volatility in a Multiple Security Overlapping

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  • Matthew I. Spiegel

    (School of Management)

Abstract

A number of empirical studies have reached the conclusion that stock price volatility cannot be fully explained within the standard dividend discount model. This paper proposes a resolution based upon a model that contains both a random supply of risky assets and finitely lived agents who trade in a multiple security environment. As the analysis shows there exist 2^K equilibria when K securities trade. The low volatility equilibria have properties analogous to those found in the infinitely lived agent models of Campbell and Kyle (1991) and Wang (1993, 1994). In contrast, the high volatility equilibria have very different characteristics. Within the high volatility equilibria very large price variances can be generated with very small supply shocks. Adding securities to the economy further reduces the required supply shocks. Using previously established empirical results the model can reconcile the data with supply shocks that are less than 10% as large as observed return shocks. These results are shown to hold even when the dividend process is mean reverting.

Suggested Citation

  • Matthew I. Spiegel, 1997. "Stock Price Volatility in a Multiple Security Overlapping," Yale School of Management Working Papers ysm32, Yale School of Management.
  • Handle: RePEc:ysm:somwrk:ysm32
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    Cited by:

    1. Matthew Spiegel, 1998. "Closed-End Fund Discounts in a Rational Agent Economy," Yale School of Management Working Papers ysm80, Yale School of Management, revised 01 Aug 2000.
    2. Matthew Spiegel, 1997. "Closed-End Fund Discounts in a Rational Agent Economy," Finance 9712002, University Library of Munich, Germany.
    3. Matthew Spiegel, 1998. "Closed-End Fund Discounts in a Rational Agent Economy," Yale School of Management Working Papers ysm80, Yale School of Management, revised 01 Aug 2000.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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